NASAA Series 66 Uniform Combined State Law ExaminationClient Investment Recommendations and StrategiesHard
An investment adviser is constructing a portfolio for a client who is primarily concerned with preserving capital and generating a predictable stream of income. The client expresses a strong aversion to market volatility and is in a low tax bracket. Which of the following asset classes would be LEAST suitable for this client?
- AShort-term U.S. Treasury bills
- BHigh-dividend growth stocks
- CInvestment-grade corporate bonds
- DPreferred stocks
Show answer & explanationAnswer & explanation
Correct answer: B. High-dividend growth stocks
High-dividend growth stocks, while offering income, are still equities and subject to market volatility. Given the client's primary concern for capital preservation, aversion to volatility, and low tax bracket (making tax-exempt income less advantageous), the growth potential and inherent volatility of equities make them the least suitable choice compared to fixed-income options.
Why the other options are wrong
- A. Short-term U.S. Treasury bills offer high capital preservation and low volatility, making them suitable for this client.
- C. Investment-grade corporate bonds provide income and generally higher yields than Treasuries with moderate risk, suitable for income and preservation.
- D. Preferred stocks offer fixed income and are less volatile than common stocks, providing a degree of capital preservation and income, making them more suitable than common growth stocks.
Capital Preservation Portfolio
An investment strategy focused on minimizing the risk of losing principal, typically prioritizing safety and liquidity over high returns.
- Suitable for investors with low risk tolerance or short time horizons.
- Emphasizes low-volatility assets like cash, money market funds, and short-term debt.
- Income generation is secondary to protecting the original investment.
Memory trick: Capital preservation means keeping your Cash Protected, not chasing risky Growth.